Tesla Motors, Inc. released its first quarter financial results yesterday, which featured a number of milestones for the auto maker. Among them, Tesla’s revenue rose 83% from the last quarter to $562 million, a record high for the company.

Tesla also posted the first ever profitable quarter in its history, with a net income of $11 million, or $0.10 on a per share basis. This large growth in revenue was largely aided by the fact that Tesla was able to recognize revenue on 4,900 out of the 5,000 Model S vehicles it managed to produce in the quarter. It is worth noting that $68 million, or 12% of Tesla’s revenue was earned through the sale of Zero Emission Vehicle (ZEV) credits to other automakers. Tesla notes in its letter to shareholders that they expect the sale of ZEV credits to decline in the future, and expect the amount to reach $0 by Q4 2013. Tesla’s move away from the sale these credits and towards growing the sale of their automobiles demonstrates their confidence in projected global demand of 30,000+ units annually. An improvement in their gross margin, which has moved up from 8% to 17%, is also an extremely important factor in their profitability.

One would expect that Tesla has settled down and is beginning to ramp up their production of the Model S while continuing to lower its costs through managing its supply chain and reaching economies of scale. After all, management reaffirmed its guidance of a gross margin of 25% for Q4 2013. In the Outlook section of the letter, Tesla explains that it expects increases in operating, research and development (R&D), and selling general and administrative expenses (SG&A).

Some of these costs may naturally rise in proportion to sales volumes. However, as Tesla fights an uphill battle to expand their gross margin, it cannot lose sight of controlling its fixed costs. Total Operating Expenses currently amount to 18% of sales. Any increase to this amount threatens to eat up any profitability that Tesla might achieve through an increase in gross margin. From a profitability standpoint, the ideal situation would be one in which Tesla could achieve its margin of 25% on its vehicles, while simultaneously taking advantage of its increase in production to achieve economies of scale and decrease operating expenses.

The most interesting line item on Tesla’s quarterly income statement is “Other Income.” Upon examining the statement solely on an operations level, one would notice that Tesla has posted a loss from operations of -$5.5 million. How could Tesla post a net income, yet be posting a deficit through its operations? One need only take a look at the line item “Other Income”, for a better picture. Other Income has a balance of $17 million, $11 million of which is from the elimination of a common stock warrant liability to the Department of Energy, and the remainder is from favorable foreign currency exchange impacts. Both of these items are irregular, specifically the liability elimination, in the fact that they will not likely happen year to year, and are not generated through the company’s regular operations. The liability elimination is also a non-cash item. To get a real sense of how Tesla performed, Other Income can be removed from the income statement (see Figure 1). The result is a net loss of $5.7 million for the quarter. It’s clear that there is still much work to be done before Tesla is truly profitable based on its operations. These types of irregular items cannot be relied upon to achieve profitability every quarter.

Figure 1(in millions)

Perhaps a more relevant dataset is Tesla’s non-GAAP figures. The non-GAAP figures, which are intend to be used by management for internal purposes, can sometimes more accurately reflect a company’s performance on the interim, without being hindered by stringent accounting regulations. Figure 2 displays Tesla’s reconciliation of Net Income from GAAP to non-GAAP.

Figure 2 (in millions)

The non-GAAP measure of Net Income is slightly higher than the GAAP reporting, at approximately $15 million. Non-GAAP starts with the GAAP reported income of $11 million. Notice how almost $11 million is subtracted from net income in “Change in fair value of warrant liability.” This represents the Department of Energy liability elimination mentioned earlier. What Tesla is doing here is effectively removing this amount from its GAAP net income, not unlike the similar calculation done above. Tesla has management has realized that this liability is a large contributor to its profits, and has removed it to create a figure more representative of its operational profitability.

The next item is stock-based compensation expense. This amount was originally included in “Total cost of revenues.” For those of you who are unfamiliar with this concept, an article by Ian Gow, an assistant professor of accounting information and management at Northwestern’s Kellog School of Management, explains it as stock options that are granted to employees. Gow explains that recently accounting standards have required companies to disclose stock-based compensation expenses, as Tesla has done by including it in cost of revenue. The article continues to elaborate that stock-based compensation expense is an area for managers to manipulate accounting data in order for them to reach their targets or benchmarks. The accounting for this type of expense becomes increasingly tricky when considering that it is a non-cash expense. While it is harder for management to toy around with this expense due to revisions to GAAP, Tesla has elected to add this expense back to their net income in its non-GAAP reporting. This is not an attempt to discredit the integrity of Tesla’s management, rather to illustrate the importance that non-GAAP figure must be taken with a grain of salt.

Regardless, Tesla has made huge strides in its earnings. Just last quarter (Q4 2012) Tesla posted a net loss of almost $90 million. Accountants and analysts can debate the significance of line items for eternity, the larger point being that of an upward trend for Tesla. In Q2 it will be interesting to see is Tesla can build on its profitability, or fall back into the red without the help of irregular account balances.

All figures taken from Tesla’s SEC Filing

Graeme Kreindler is an HBA Candidate at the Richard Ivey School of Business at The University of Western Ontario.

The government didn’t make a good investment in Tesla. When a VC invests in a start up, they get equity. That means unlimited upside potential if their investment is good. That’s why VC can afford to lose most of the time. They’re counting on 400+% returns when things work out. All the government can get is their money back. Oh yeah, and they get to continually hand out subsidies to create Tesla’s market. Great investment!

You might want to find a place that will price match the TireRack.com. Their user surveys are good resource for rating tires too. Sometimes tires get lower scores when they’re really just over priced, but when a moderately priced tire has a low score based on several million user miles, it is worth avoiding. They didn’t like the RSAs. The Eagle GT rates much better, but still a tier under the best tires in the class. Usually I’d recommend the Conti Extreme DWS in the ultra high performance all-season category, but I see they’re much more expensive in your car’s size. Of the tires in that size, the Eagle GT looks like it comes up 2nd to the DWS since the Bridgestone RE970PP and Michelin Pilot Sport A/S aren’t available, but the gap from first in most performance categories is pretty huge. The price difference is $220 a set though. I’d spring for the Continentals, but I don’t do burnouts.

They’ve brought back manufacturing to the factory, they’re employing hundreds of tax paying workers in good jobs, they’re giving America a tech edge, they’re producing a useful and potentially game changing product (remember the cries for energy independence), they’re paying back the loans ahead of schedule.

I’d say this i what govt. should be doing. Govt. is not a VC – it’s not a business – it’s govt..

It is a govt. Which is why it should not get involved in building cars. Five Year Plans always produce jobs. Unless the jobs are value creating, rather than value destroying, they would be better off not created. And, if it should turn out Tesla’s jobs are value creating, they wouldn’t need to be subsidized by taxpayers in the first place.

You’re suggesting that the government should have equity stake in Tesla like a VC would. Have you thought that through?

Do you seriously want the government owning equity in a publicly traded private business? That would actually be socialist.

This was the problem with investing the social security trust funds in the stock market, too. If you do that, then the government owns big parts of private enterprise. That would be nationalizing American business at a massive scale. I’m the liberal Fox News warned you about, and I’m very opposed to that kind of government power increase, even if it would be a “good investment”.

It’s much more appropriate to just loan Tesla the money, collect a return big enough to cover inflation and administrative costs, and lend it out to the next high startup if/when they get it back. This is where you and I disagree. You’ve argued against this program pretty strongly, but I actually think its a good idea, and better than the government acting like a real VC, and better than waiting around for Japan or China to develop technologies and sell them to us. But this is something that there should be a hearty debate about.

P.S. Even more efficient than that is a “loan guarantee”, where the government doesn’t actually lend the money, but cosigns the loan (and potentially takes out an insurance policy in case it doesn’t get paid back). It’s an incredibly efficient way to back a business without coating much and shifts the balance of power even less.

The people who are lending this money are government employees who need to be paid and suck down taxpayer money, becoming another permanent part of the parasite class. The people who are lending the money are not lending their own money. When the money is lost, they do not get fired. Time and again, you find connections between recipients of the money and friends and financial benefactors of the administration. For these reasons, and I’m sure many more, these loans are cesspools of incompetence, waste, and corruption. The private market already has mechanisms for this type of investment, which, if not taxed, regulated or vilified out of existence has, can and will out-compete any other system known to man.

Wow, a lucid argument, without the use of inflammatory terms. Of course, you’re fighting an uphill battle against ammunition like “parasites, regimes, strawman”, etc.

I’m in agreement with targeted, intelligent (and yes, sometimes risky) government investment in advanced industries, especially if it moves us away from the entrenched (and yes, subsidized, but that’s somehow more patriotic) fossil fuel industry.

If you look at the Iraq War as a government “investment”, say in military contractors and the likes of Halliburton (and its many bloodsucking “subsidiaries”), I would call it the worst debacle in recent memory, and in doing so, I’m by no means disrespecting the brave soldiers who fought there (and may disagree with my assessment).

Of course I don’t want the government holding equity in any companies. That’s fascism, like GM’s ‘bankruptcy.’ I don’t want the government investing in crony capitalism period.

Privatize social security and it won’t be the government investing in private industry. It will be people investing for their retirement. This also won’t have certain politicians pushing for unlimited immigration in the hope of funding SS until they’re out of office.

I’d go Michelin PSS or Conti ExtremeContact any day: the extra $100 per tire is peanuts compared to the cost of the car, and provides far better grip and ride. But like CJinSD, I’m looking for handling, not burnouts. (Thinking that any 245/45R20 tire will provide credible all-season performance is a whole other topic, though.)

The Tesla Model S just scored 99 out of 100 in Consumer Reports testing, the highest score ever for a car. Doing well in Consumer Reports is always good for sales and the near perfect score here will no doubt keep demand high for a long time to come. What a turn around since that laughable article in the NYTs two months ago. Love how Musk came out swinging on that one.

And your point is, what, that a great score in Consumer Reports can’t revive a dead nameplate? The news today would be as if the 1990 Lexus LS received 99/100, and had production capacity to fill 100% of the new demand.

Oh, I see, well tell me what are your favorite parts of YOUR new tesla?
Tesla is a niche that has little room to grow, you’d have to be mighty rich to afford a extra vehicle with massive drawbacks, as a toy, of which they are.

Not saying that it’s a bad car, but rather your testing a car that has little demand and a high price, that’s two very big negatives, regardless how CR thinks it is.
CR could give a Ferrari a 100/100 but the people that purchase a Ferrari don’t give a damn about the testing of CR, their not buying it for reliability, just like Tesla owners aren’t buying for reliability, as they have 10 other vehicles anyway.

You are confusing CR scoring in a road test for a new car with their frequency of repair data. There is a clear correlation between a surprisingly good score in CR for a new model (one that non-car guys don’t know much about) and sales.

The frequency of repair data is different. There are so many cars with near perfect scores that it’s not a differentiator. That said a poor score in FOR will prevent a car from being recommended by the magazine until things improve. That could slow down demand for an otherwise good car.

We aren’t there yet and my guess is that Model S will do very, very well when the FOR data is available. I fully expect some grade inflation from the zealot current owners.

I reread what I said, and again I inserted a general opinion that could apply to any small niche startup automaker, I never singled out Tesla for wrong doing(drawbacks are with every startup, such as parts availibility), such stated my opinions from an economic standpoint.
Again I don’t have anything bad to say about the car itself, therefore I don’t possess an opinion for or against the vehicle.
Now, I can tell you WANT me to say something bad about the car, but I have not done so and refuse to make judgements based on what I don’t know, unlike some.

Although common sense tells me I should not have to defend what I have said against what I haven’t said, since I expect the comment reader would be able to interpret the comment.

It is about same price as 5 series BMW taking into account 7500 tax credit, no sales tax in some states and that BMW wants $300+ worth or premium per month and oil changes (unless you trust that 15000 miles free BMW service). Certainly not cheap but not exotic either.

I’d like to know what company was dumb enough to throw money at something like that.
Would give good reason not to support a company, if they can’t handle resources without spending money on something that has no benefit to them or anyone else, then what else are they incapable of?

Huh? The companies that bought the credits likely did so to save money. CARB mandates that auto manufacturers build a certain number of ZEVs per year. Any automaker that doesn’t meet the minimum (say, Ferrari) can purchase credits from those that make more ZEVs than are required (Tesla), thus covering its shortfall and avoiding CARB-imposed fines.

That said, some luxury and sports car manufacturers that don’t meet federal CAFE standards view the resultant penalties as a cost of doing business. I would expect them to treat any CARB fines similarly. (I don’t believe CARB has actually levied any fines yet.)

Things have really improved out here with Apple, Google and now Tesla doing so well. Real estate price increases in LA, SF and SD top the nation even exceeding those in Washington. Crime is way down, air quality up and the universities are top rated. We are attracting the best and brightest from all over the world and the Asian influx is particularly high, higher than from Mexico. No surprise when you consider the desirability of the state and how well Mexico is doing in unemployment. Look two articles down.

The Golden State is truly the new Nirvana, don’t you know ? Who wouldn’t want to fork over 9 % of his gross pay to Governor Moonbeam and part with 7 % + on everything bought in a store ? Then again, if you’re in a bad mood, you can always daydream about taking a high speed train from nowhere to nowhere in the Central Valley. Ever wonder why California didn’t pick up a seat in the House following the 2010 census ? The Bear Flag Republic is beyond its sell-by date.

Yeah, this is pretty normal in certain industries where credits for certain things are tradeable. In certain years, when production is high, you use all your credits, and in other years you sell them to someone else.

Yup no reply button for him just you. Don’t know enough about accounting to comment, though it would seem with all the visibility on Tesla no one there would try to pull something shady, after all the hard work and success.

You see that when companies and people are more desperate (Tucker, DeLorean) not when there is much to lose.

Never noticed OFR before and wouldn’t have replied had I seen his other post first, the one about milk. Hummer sounds drunk.

I saw a presentation on this the other night from a car guy MBA student.

He claimed that Mercedes was one of those companies, and that the CAFE fines (not including the consumer-side gas guzzler tax or any CARB stuff) added about $127 to the cost of a new Mercedes.

He went on to claim that a Mercedes buyer isn’t going to care too much about that on a premium car, but that Corolla customers will haggle over it. He works for a Toyota dealership, he has direct knowledge about what Corolla customers will haggle over…

I know what i learned in school in a basic accounting class. It’s good enough for me. No harm done considering i don’t use the knowledge to actually invest in anything. I think that would be best served by someone else.

Where does it say they have recognized revenue on unsold cars? If you read the 8K, they say they are getting orders at a rate of 20K/year, so the fact that they recognized revenue for 4900 out of 5000 cars produced is not a surprise. You clearly didn’t read the 8K:

“During Q1, we consistently produced 400 or more Model S vehicles per week, for a total of over 5,000 during the quarter. We recognized 4,900 vehicles as revenue, exceeding our initial Q1 guidance of 4,500, despite physically delivering a higher number of vehicles, as the standard for revenue recognition was extremely high. Even if a car was received, fully paid for and signed off as good by a customer, we did not recognize the revenue if the paperwork was incorrect.”

Their GAAP numbers gave an $11M profit. Their non-GAAP numbers gave a higher number. Everyone posts non-GAAP adjustments, especially when there are one-time items or to show the effect of certain things like employee stock options, as DC Bruce said below. Why are you trying to suggest this is unique to Tesla? Ever looked at pro forma numbers before? I’m not clear that you actually do know that much about accounting or reading financial statements.

$11M profit in Q1 on non operating items does not justify an $8 billion market cap, especially with no dealer network and a car that is priced out of reach of 99.5% of all licensed drivers. This is a bubble waiting to pop. Anyone remember Pets.com? 1990s Sock puppet = 2013 Elon Musk

JC Penney does have some real estate that makes the company worth something even in bankruptcy. Their outgoing “fired” CEO thought he could turn a 100 year old low brow retailer into the next Apple. At least JC Penney has the ability to stay somewhat profitable with a national footprint.

You read it here first: 5 years from now, JC penney will still be around, struggling but alive.
Tesla will be bankrupt, the subject of a Harvard Business School case study of over hyped bubble companies financed with other peoples money. When the $$ runs out, the fat lady sings, game over. No bailouts for a small company that has no political pull. Running an auto company takes HUGE amounts of cash, more so than any other industry. Fisker learned the hard way. Tesla will as well.

The people commenting here are called the “Best and Brightest”? Heaven help us.

IF I accept your 99.5%, which I don’t, then at an annual 13 million US sales, that would be a 65,000 market annually. Likely it is more like 95%, and a 650,000 market. So what’s the problem with squeezing maybe 30,000 sales for a radically new and exciting car?

If they are successful, they will move downmarket as they can afford to do so. Though it is not mandatory that they do; some car companies never have, and we still like them.

As for the profits from the CARB mandates, that is a California thing (at least for now) and if some other car companies want to meet the CARB mandates by buying credits from Tesla, I can’t blame Tesla for taking advantage of it.

Tesla is taking advantage of every tax break and loan available to them, just like every other company in existance. The worst of the tax breaks will probably be eliminated in a few years it there are enough complaints. Things like that are slow to change, no matter who is in power.

I throw stones because people that don’t want Teslas pay for them. We pay in ZEV credits bought by companies whose cars we do buy. We also pay for the compliance cars they build to escape the ZEV requirements we didn’t want, cars that are sometimes built with through coerced partnership with Tesla. We pay in DoE loans. We pay in subsidies for recharging infrastructure. We pay in tax breaks for buyers, people who vote for this warped corruption in the first place. We pay when our employers subsidize the parasites that drive them with expensive chargers and company electricity. We pay in privileges granted to the subsidized and wealthy buyers, like HOV access.

It would have been impressive if Musk had built Tesla with private funds and sold them for something reflecting their cost successfully to people paying for their own cars. That didn’t happen. Instead the deck was stacked in his favor and we pay for every hand he wins.

Elon Musk is as connected to reality as Marie Antoinette. She costumed herself as a peasant woman and repaired to the Petit Trinanon to milk cows. She and Musk both “play at life”. The Tesla foolishness has as much relevance to the real world as a pail of milk extracted from Louis XVI’s herd.

You pay taxes for road maintenance on roads you don’t drive on. Except one day you might drive on them and one day, God forbid, you might buy a Tesla.
At least Tesla has not thrown the money away so keep the stones for something more deserving.

Most roads serve me whether I drive on them or not. The food I eat and goods I buy travel on them. I’m not being served by putting some wealthy tick in an expensive electric car. Tesla is still throwing the money away. They came close to breaking even because of a $68 million dollar tax placed on other car buyers. That’s in addition to their subsidized market, their access to cheap tax payer capital, and their marketing costs being born by our propagandist media. They’re as good a symbol as any of the wanton corruption being perpetrated while a public that has been taught not to think stands idly by.

Yes the wealthy ticks get all the breaks don’t they… Sigh! I guess I am just trying to say that your / my tax money goes to things you don’t always use or get direct use from and as such, it could be worse. Tesla is not really the root of your rock throwing anger, is it?

@Beerboy, It’s true tax money is wasted on many many things. People like CJ and I are equally pissed about those things too. But this article is about Tesla, so right now, we’re going to gripe about what BS this is, hopefully keep some ferver going, and vote about it at the next opportunity.

California’s CARB is designed to promote clean air. California has much cleaner air due to the regulations CARB implemented over the last 50 years. Californians, and the US generally, has greatly benefited from the environmental regulations established in California that have become the industry standard. And no, the auto industry would not have done this on it’s own. Protecting “the commons” is one of the primary purposes of government.

That is it exactly CJ. Many years ago a company marketed “Pet Rocks.” They were rocks with doll clothing glued on them, or something like that. People bought them. I thought is was stupid, but harmless, because I did not have to pay for them. Teslas and all the rest of this insane socialist college professor king for a day energy foolishness is coming out of my pocket. Meanwhile, oil and natural gas reserves are exploding all over the world. Yes, Teslas are cool as hell to me, but fk Tesla as long as they are yet another tax-sucking, mandate-favored government social experiment.

It has not been that long that GAAP has required company financial statements to recognize stock options as an expense; and the arguments in favor of doing it are not overwhelming. Strictly speaking, stock options dilute shareholder equity, but have no effect on operations.

So, I have no problem with non GAAP reporting that excludes stock options.

Even though I think the car is a rich person’s toy that has been subsidized to no good end by taxpayer dollars, I have to respect Tesla’s ability to deliver a car that performs as promised (unlike, say, Fisker) and properly identify its market (toys for rich boys) unlike, say, Nissan, which was dumb enough to make a major investment in the Leaf (which no one wants) and also suck a lot of taxpayer money along with it.

The car’s limited range is well within the parameters of what its customers will want. Contra the NYT article about driving a Tesla from DC to New Haven, your typical Tesla owner would not be caught dead on the New Jersey Turnpike and Interstate 95 in a Tesla or anything else.

He will take the Acela, business class, or, if he’s going north of New York, fly (and for many of the owners, he won’t fly commercial either).

While were keeping tabs on the tabs we pay, let’s not forget to include the special tax incentives granted to the petroleum industry, e.g. the Production Tax Credit (PTC), the Investment Tax Credit (ITC), plus the federal Loan Guarantee Program, , and depletion allowances granted to independent oil producers – all designed to support an important industry. To do likewise for needed alternative energy sources seems consistent, fair, and forward looking.

The only thing special about the ‘special tax incentives granted the petroleum industry’ is that they’re capped at 6% while the rest of US industry can use the tax incentives to the tune of 9%. Calling them oil subsidies is intentionally misleading.

Whether 6% or 9%, if you are true to your professed ideology, you should be just as appalled at any government financial assistance to the petroleum industry (in whatever form) as you are to help for Tesla and other EVs.

That’s the thing I’ve noticed with people in general (not just you) complaining about government subsidies: they complain loudly when the money is spent on something they oppose for other reasons, but grow strangely silent when the money is spent on something they approve of.

You might wish that was the case, but it’s not. CJ isn’t defending the oil industry, he’s pointing out they actually get less of a favor than other industries, following Auto’s comment trying to show that the EV industry is merely getting equal treatment.

In any case, this level of Government meddling in business is unacceptable in any industry. The fact that Tesla is still barely keeping it’s head above water is not an indicator of success of said meddling, but a show of good salesmanship to those who want to believe.

“Whether 6% or 9%, if you are true to your professed ideology, you should be just as appalled at any government financial assistance to the petroleum industry (in whatever form) as you are to help for Tesla and other EVs.”

Wouldn’t it make more sense to go after all the industries that can shield 9% of their income from domestic production activities? Right now, the oil industry is subsidizing them by your sort of ‘logic.’ I’d have to be a complete imbecile with no sense of proportion to be just as appalled by the Deduction relating to income attributable to domestic production activities(section 199 of the IRS code) as I am by direct subsidies to political cronies of this corrupt regime.

Tesla may have reported gross profit margin of 17.1%, but it would have been only 6.4% without the zero-emission credits. Excluding nonrecurring items and the zero-emissions credits, pretax income would have been -$68.2 million. Assuming a 35% tax rate, net income would have been -$44.3 million. Just sayin’.

I suppose you think those subsidies would be put to better use in the form of unemployment funds for the people that are now employed in Fremont and paying taxes. I know, electric cars don’t make sense to you because – well, you live on the coast and all that nasty stuff just blows inland and isn’t your problem. Can’t all those whiners in Glendale just learn to appreciate all the pretty yellow air hovering over their city?

I do agree that a subsidy on a Tesla probably doesn’t make sense since it’s an amount that isn’t really a lot of money to the people buying them, but never fear. The government is immensely talented at finding ways of taking back that subsidy. Go to register your Tesla and some localities will take back that subsidy and more.

@CjinSd
I’m looking for your outraged posts about the cost of subsidizing the military/political policy to protect oil supply lines, direct subsidies to oil companies, the deaths of other peoples’ children and 9/11. Could you provide links?

One of Tesla’s real opportunities is in Europe. The difference between gas prices and electricity prices is far greater there, and the reduction in operating costs means that the car is about half the price that it is in the US. Supposedly in Norway, where the strength of the currency makes any imported goods seem ridiculously inexpensive, Model S production is already sold out through the end of the year. Why is the Norwegian currency doing so well? Oil of course!